$6 Billion Problem for Mobile Carriers

The real issue of the three-device (smartphone, tablet, and notebook) endgame is not the form factor but a $6 billion revenue loss for carriers -- and potentially a huge problem for device manufacturers.

The Death of the Smartphone blog was perhaps too focused on the form factor battle of a user reducing from four to three devices.

The real issue of the three-device endgame is a $6 billion revenue loss and potentially a huge problem for device manufacturers. The 1 million of us who are tech-savvy (enough) might just decide to ditch the subsidized smartphone and go with near-free phone calls with longer upgrade cycles.

Taking the US mobile carrier business as a loose proxy for the global business, it's roughly a $30 billion business. At a microscopic level, my monthly AT&T phone bill was $500-$1,000 per month. It's not difficult for me to imagine about 1 million Americans with similar phone bills, with international voice and data roaming representing about 80% of the total bill. The $6 billion market is a rough but, I believe, good estimate of business mobile usage.

It's not difficult to notice apps like Whatsapp and Skype have become the long-distance carriers of choice when there is a wireless LAN network. But without a cellular network, it is just not reliable enough for business communication, regardless of how few impromptu calls we make anymore. Then comes T-Mobile.

When the proposed AT&T acquisition of T-Mobile failed, I don't think any of us thought it would change the world. But it did.

In desperation, I think, T-Mobile announced the global roaming data plan of around $100 for 3 GB of data, compared to a similar cost for just 150 MB of data from AT&T. Instantly, the reliable phone call problem was solved, rather elegantly, by a simple call forwarding from AT&T number to Skype number. With a working phone app paradigm and low-cost Internet access, I have turned off my smartphone during my international travel most of the time, using just my tablet instead.

There are several advantages.

First, the battery life is much longer than a smartphone. Second, the display size is now seven inches instead of four. Most important, my mobile phone bill has come down from an unpredictable $500-$1,000 per month to a predictable $200 per month -- half to AT&T and half to T-Mobile.

It's taken me a bit of time to get used to carrying a tablet to business lunches or using my tablet to make a phone call. After three months, I have now gone several days without touching my smartphone, especially if I am overseas. With just two devices in my backpack, I also misplace my gadgets less often. Last, because the tablet is my go-to device, I seem to read more books and get on to Facebook less.

I am not sure if T-Mobile intends to cannibalize the mobile industry -- or if, indeed, what I have experienced becomes the norm. If it does come to pass, then the mobile industry stands to lose about $6,000 per year in revenue from me. I am not sure if there are 1 million of us who spend this much annually in the US. If there were, then this would be a $6 billion revenue loss per year -- out of the total revenue of $308 billion for AT&T, Verizon, T-Mobile, and Sprint combined.

As for the handset makers, I think the impact might be less.

Instead of getting one smartphone per year, at a full retail price of $600, I think I will end up upgrading my tablet once every two years. Assuming handset makers don't share any of the profit on a monthly basis from the carriers, this could mean a revenue loss of just $600 million dollars per year.

The bigger issue is that, without the subsidy and, therefore, the rush to upgrade, the handset makers will lose their most effective marketing tool: the viral spread of new smartphones. I am not smart enough to predict the demise of the upgrade frenzy, but I believe it will definitely slow down.

The bottom line for the semiconductor industry in which I live is that smartphone growth rates will slow down faster than we have been used to seeing. If this blog had been published as soon as it was written in January, it would have foretold ARM's revenue and earnings shortfalls from the smartphone segment. But the PR department and I just moonlight as journalists, so there you go.

I don't know about you, but I've never seen an "elite" make *any* effort to save a buck when it comes to their personal expenditures. In fact, most of the egregious high-ticket freebie-grabbing seems to come from that segment. While engineers are famous for their (sometimes agressive) love of free t-shirts and lunchtime sales meeting sandwich pick-overs, the execs don't have any qualms about sticking it to the man for $20K home-teleconference systems and T-1 lines (phhhht, equivalent-speed DSL/cable connections are for the 99%).

Does anyone seriously think that someone like this is going to consider carrying around another device (or managing two on the table instead of one) for $6K/year? That's probably the difference between a single round-trip down-grade from first-class to business (or private to commercial). That's noise to a lot of people (although I'll grant you probably not 1 million of them, but not that far off). I'll believe it when I see it!

I see more risk from the 99% to whom a $500/year telecom-bill haircut actually means something -- more of what Skype has done already. Unless the telcos can find a way to make non-free wireless service bright and shiny, eventually all of the mouth-breathers are eventually going to need a shave. The medium/long-term economic outlook can't seem to be telecom's friend when it comes to the non-1%.

Not sure I care either way as a user, but my company definitely loves the saving. BUT, as CEO of a technology licensing company generating royalty revenue from the smartphone, it's definitely a concern. The semiconductor industry got its birth from the computer business, and the transition from computing to mobile communication was so seamless we've all taken for granted it will continue to grow. But what if it doesnt?

I agree with you, TonyTib. Most recent discussions about iPad flatlining also underscores the similar issue. Carriers are subsidizing a bi-annual upgrade habit while most iPad2s are still in use (so that's about 3+ years now). Without the $6M carrier revenue to subsidize the top-end of the users, watch the iPhone flatlining too.

My view: the subsidy model in the US will slowly go away from pressure from T-Mobile and MVNO's (especially BYOD MVNOs) such as Ting, SimpleMobile, and Republic Wireless.

I suspect Apple will get hurt more, because I'm pretty sure they get higher subsidies. For example, if a Nexus 5-class phone is $150 subsidized and an iPhone is $200 subsidized, there's not much difference. However, if the difference is buy used for <$200 (my choice), pay $350 for a Nexus 5 from Google, or pay >$600 for a iPhone (or Galaxy S5/Note 3), then yes, consumer behavior is going to change, and the high end will shrink.

Sorry to disappoint you, Lewis, but I am not a elitist, and far, far from the 1% (if I were, I wouldn't have traveled for business, and wouldn't carry anything electronic with me). But what I am trying to point out is that the worldwid is dominated by a bi-modal model. In this case, the early adoptors are doubly important because they are the "viral effect" that help spread the adoption. 15,000 miles from Beijing, I have traveled to the outskirts of Harbin, China (near Russian border) and see this viral effect first hand.

It is sad that the most pervasive electronic gadget has degenerated into thinness, multi-core, etc. So if that's what you mean, I agree with you. What I am further saying is that, for the $6B business which the international business "elites" spend, it's about to end. Whether that changes the business model, and what Qualcomm, Samsung, etc. pump out, it's the question that I am asking aloud.

The methodoloogy here is great -- if you assume not only that cell phone users across the world are like Americans -- but also that a significant percentage of Americans have significant costs related to frequent international travel.

This isn't an argument for what may or may not ail the industry.

It is an argument for how out of touch an elite can be.It's not that great a leap from there to how disastrous business and policy decisions are made by that elite.

Using tablet works very well instead of phone. I agree to that. Guess tablet market will always stay. Smartphone is something nice to have. But a nice tablet and a handy phone are good option for travel.